Blocked Credit under GST

Blocked Credit under GST

"Blocked credit" under the Goods and Services Tax (GST) refers to the Input Tax Credit (ITC) that a registered business is legally ineligible to claim on certain goods or services, as specified in Section 17(5) of the CGST Act, 2017. This provision overrides the general rule that allows businesses to claim ITC on purchases made in the course or furtherance of business. 

Purpose

The main objectives of blocking certain credits are to:

• Prevent misuse of ITC for personal consumption or non-business expenses.

• Avoid cascading effects selectively, primarily on items deemed to have an element of personal consumption (e.g., certain employee benefits, food).

• Ensure only genuine business inputs that directly relate to taxable outputs are eligible for tax benefits. 

Key Categories of Blocked Credits (Section 17(5) of the CGST Act)

Under Section 17(5) of the CGST Act, ITC is generally not available for several categories of goods and services, including: 

• Motor Vehicles and Conveyances: ITC is blocked for motor vehicles with a seating capacity of up to 13 persons, as well as vessels and aircraft, with specific exceptions. Exceptions apply if these are used for further supply, passenger transport, or training.

• Related Services: General insurance, servicing, repair, and maintenance for the blocked vehicles, vessels, or aircraft are also generally blocked, with the same exceptions.

• Personal Consumption Items: ITC is blocked on food, beverages, outdoor catering, beauty treatments, health services, and cosmetic/plastic surgery. An exception exists if these are used for making a taxable supply of the same category or are part of a composite/mixed supply.

• Club Memberships and Travel Benefits: Membership fees for clubs, health, and fitness centers are blocked, as are travel benefits like Leave Travel Concession for employees. An exception applies if providing these to employees is legally mandated.

• Works Contracts and Construction: ITC is blocked on works contract services for constructing immovable property (excluding plant and machinery). An exception is made for suppliers who further supply works contract services. ITC is also blocked on goods or services used by a registered person for constructing immovable property on their own account, again with the exception of plant and machinery.

• Other Blocked Items: This includes goods/services taxed under the Composition Scheme, those used for personal consumption, goods lost, stolen, destroyed, written off, or given as gifts/free samples, and tax paid due to fraud-related demand orders (Sections 74, 129, and 130). 

Compliance and Reporting

Businesses must ensure that blocked credits are not claimed in GST returns. The GSTR-2B statement available on the GST portal can help identify eligible and ineligible ITC. Any wrongly claimed blocked credit must be reversed and reported in Table 4(B) of GSTR-3B with applicable interest, as claiming ineligible ITC can lead to penalties. 

Conveyance and Transportation - Clause (a), (aa), and (ab)

ITC cannot be claimed on passenger transport vehicles like -

• Three-wheeler auto-rickshaws

• Four-wheeler motor cars

• Two-wheeler cycles or motorbikes

• Buses or Tempo travellers having 13 seats or less, including the driver

• Any other vehicle used on the road

However, an ITC claim is still available for purchasing passenger transport vehicles if the buyer is engaged in the following businesses -

• Passenger transportation service/ cab service/ bus rental service/ lease service

• Automobile retail shops, manufacturing establishments, and showrooms.

• Driving schools

Clause (a) of section 17(5)

Passenger transport vehicles having a seating capacity not exceeding 13, except when they are used for the following taxable supplies -

• Further supply of such motor vehicles.

• Transportation of passengers

• Imparting training for driving such vehicles

ITC claim is not available on GST paid for the purchase of vessels, ships, and aircraft. However, ITC can be claimed if the buyer is engaged in the following businesses -

• Reselling of ships, vessels, and aircraft

• Has training schools for flying aircraft and navigating vessels/ships.

• Plane service/ cruise service/ boat rental service/ passenger transportation service.

• Goods transportation service through trillers/trucks and tractors.

Clause (aa) of Section 17(5)

ITC also cannot be claimed for buying insurance or the repair cost of servicing the cabs, tempo travellers/minibuses, ships, vessels, or aircraft. ITC is allowed if the buyer is engaged in the following businesses -

• Exceptions under clause (a) and (aa)

• Manufacturers of conveyances listed above

• Insurance companies selling general insurance for the above-mentioned conveyances.

Clause (ab) of Section 17(5)

Services of general insurance, servicing, repair, and maintenance related to motor vehicles, aircraft, and vessels mentioned in clauses (a) or (aa) is allowed in the following cases:

1. When the motor vehicles, vessels, or aircraft are used for the purposes specified in clauses (a) or (aa).

2. When the services are received by a taxable person engaged in:

1. Manufacturing these motor vehicles, vessels, or aircraft, or

2. Supplying general insurance services for these motor vehicles, vessels, or aircraft insured by them.

Clause (b) - Vehicle Renting, Food, Catering

ITC cannot be claimed on the purchase of the following -

• Expenses on outdoor food, beverages, or catering.

• Expenses on cosmetic surgery, beauty treatment, plastic surgery, and health services.

• Renting or leasing vessels, aircraft, or motor vehicles is permitted.

• Obtaining life insurance and health insurance

• Incurring expenses for club memberships or health and fitness centers

• Expenses related to employee leave or home travel concession during vacations.

Exceptions under clause (b)

ITC can be claimed -

• On resale of the same goods or services

• Composite or mixed sale together with other goods.

• When it is mandatory to provide goods and services to employees for legal compliance

Clause (c) and (d) - Building Construction

If you're registered for GST, you can't get a tax credit for the GST you paid on building construction or job work expenses, whether it's for commercial or residential buildings, including materials.

Also, if you spend money fixing or renovating buildings, even if it's recorded as an asset, you can't claim a tax credit.

However, if you're a construction company, builder, or promoter selling these buildings after construction, you can still claim a tax credit on those expenses. And you can also get a tax credit for buying or building plants and machinery.

Clause (e) and (f) - Non-resident and Composition

Section 10 imposes a restriction on composition taxpayers, disallowing them from claiming Input Tax Credit (ITC) on GST paid for purchases, given their quarterly turnover tax payment. Additionally, Section 17(5) of the CGST Act specifies that ITC is not accessible for composition-taxable persons, regardless of whether they supply goods or services.

For non-resident taxable persons, advance tax deposits are required. They can seek ITC for Integrated GST (IGST) paid on imported goods but are not eligible to claim ITC for any other domestic purchases.

Clause (g) - Personal Use

ITC cannot be claimed on goods purchased and used for personal purposes. If the goods purchased are partly used for personal and partly for business use, then ITC is allowed on the value of goods/services used for business purposes.

Clause (h) - Free Sample and Lost

ITC cannot be claimed if the goods are lost, stolen, written off, damaged, or given away as free gifts.

Clause (i) - Fraudulent ITC Claims

Input Tax Credit (ITC) cannot be claimed for the following -

• Previous instances of non-payment or insufficient tax payment,

• Overpayment of tax refunds,

• Unlawful utilization or fraudulent acquisition of excessive ITC, or

• Wilful misstatements, suppression of facts, or confiscation and seizure of goods.

Deemed Exports

Deemed Exports

Under GST, a "deemed export" refers to a transaction where goods supplied do not physically leave India, but the supply is still treated as an export for tax purposes. These supplies are notified by the Central Government under Section 147 of the CGST/SGST Act, 2017. 

Central Tax Notification No. 48/2017 outlines the categories of supply that qualify as deemed exports under GST. These include the supply of goods against an Advance Authorisation (AA), Export Promotion Capital Goods (EPCG) authorisation, and supplies to Export Oriented Units (EOUs), Electronic Hardware Technology Park (EHTP) Units, Software Technology Park (STP) Units, or Bio-Technology Park (BTP) Units. Additionally, the supply of gold by a bank or Public Sector Undertaking against an Advance Authorisation is considered a deemed export. 

• Standard rate: For most deemed export supplies, the supplier charges and collects GST at the normal rate applicable to those goods, based on their Harmonized System of Nomenclature (HSN) code.

• Concessional rate for merchant exporters: In some specific cases, such as a supplier providing goods to a merchant exporter for final export, a concessional GST rate of 0.1% may be charged. This is a separate provision from deemed exports, though the terms are sometimes conflated. 

Deemed Exports under GST are supplies of goods, manufactured in India, that do not physically leave the country but are still treated as exports under specific government notifications. Unlike regular exports, they are not zero-rated at the time of supply, meaning GST is paid upfront and later claimed as a refund. The objective is to provide a level playing field for domestic manufacturers. 

Key characteristics and conditions

• Only for goods, not services: The deemed export status applies only to the supply of goods, not services.

• Goods must stay in India: For a supply to be considered a deemed export, the goods must not physically leave the Indian territory.

• Notification by the government: The transaction must be explicitly notified as a deemed export by the Central Government under Section 147 of the CGST Act.

• Payment in convertible foreign exchange or Indian Rupees: Payment for these supplies can be received in Indian Rupees or any freely convertible foreign exchange.

• Taxable at the standard rate: The supplies are subject to the applicable GST rate at the time of the transaction and cannot be made under a Bond or Letter of Undertaking (LUT).

• Refund is admissible: The GST paid on the supply is eligible for a refund, which can be claimed by either the supplier or the recipient, subject to certain conditions. 

Notified categories of deemed exports

As per Notification No. 48/2017–Central Tax, the following supplies are considered deemed exports: 

• Supply to Advance Authorization (AA) holders: Goods supplied by a registered person to a recipient holding an AA.

• Supply to Export Promotion Capital Goods (EPCG) holders: Capital goods supplied to a recipient holding an EPCG authorization.

• Supply to Export Oriented Units (EOUs), etc.: Supply of goods to an EOU, Electronic Hardware Technology Park (EHTP) Unit, Software Technology Park (STP) Unit, or Bio-Technology Park (BTP) Unit.

• Supply of gold: Supply of gold by a bank or Public Sector Undertaking against an AA. 

Key differences from regular exports

Unlike regular exports, deemed exports are not zero-rated supplies and cannot be made under a Bond or Letter of Undertaking (LUT). 

Feature Deemed Exports Regular Exports

Physical movement Goods do not leave India. Goods are taken out of India.

Tax status Not zero-rated; GST is paid on the supply. Zero-rated; no GST is charged.

LUT/Bond Cannot be supplied under a Bond or LUT. Can be supplied under a Bond or LUT without paying tax.

Refund A refund of the GST paid can be claimed by either the supplier or the recipient. A refund of the Input Tax Credit (ITC) can be claimed.

Refund procedure

The tax paid on deemed export supplies can be claimed as a refund by either the supplier or the recipient. The recipient of the deemed export supply is required to file the refund application on the GST portal using Form RFD-01. 

Special provision for EOUs

In some cases, such as supplies to Export Oriented Units (EOUs), a lower concessional GST rate of 0.1% may be applicable. The EOU must provide a prior intimation and an endorsement on the tax invoice to complete the process. 

Deemed Exports the Government may, on the recommendations of the Council, notify certain supplies of goods as deemed exports, where goods supplied do not leave India, and payment for such supplies is received either in Indian rupees or inconvertible foreign exchange, if such goods are manufactured in India.

Related provisions of the Statute Section or Rule Description 

Section 2(39) Definition of ‘Deemed exports’ 

Section 2(52) Definition of ‘Goods’ 

Section 2(56) Definition of ‘India’ 

Section 2(72) Definition of ‘Manufacture’ 

Introduction This section deals with notification of certain supplies of goods as deemed exports upon recommendation by the GST Council. 

Analysis The notified goods would be deemed to be exported, if such goods are manufactured in India although they do not leave India and payments are received in Indian rupees or convertible foreign exchange

This section authorizes the Government to notify transactions which will be declared to be deemed exports. It is clear that ‘deemed exports’ are NOT exports but placed in a class of its own to be eligible to benefits of NIL GST on procurement subject to conditions to be specified. 

Related provisions Section 2(39) of the CGST Act, 2017 defines the term ‘deemed exports. This would be relevant for extending refund benefit under section 54 of the CGST Act. 

Rule 89 of the CGST Rules is relevant for claiming refund in respect of deemed exports. This rule prescribes forms & procedures for claiming refund in case of supplies made to a special economic zone.

Second proviso to rule 89(1) states that in respect of in respect of supplies regarded as deemed exports, the application may be filed by, -

(a) the recipient of deemed export supplies; or 

(b) the supplier of deemed export supplies in cases where the recipient does not avail of input tax credit on such supplies and furnishes an undertaking to the effect that the supplier may claim the refund.

Documents required for Refund in case of Deemed Export 

1. Acknowledgment by the jurisdictional officer of the Advance Authorisation holder or Export Promotion Capital Goods Authorisation holder, as the case may be, that the said deemed export supplies have been received by the said Advance Authorisation or Export Promotion Capital Goods Authorisation holder, or a copy of the tax invoice under which such supplies have been made by the supplier, duly signed by the recipient Export Oriented Unit that said deemed export supplies have been received by it. 

2. An undertaking by the recipient of deemed export supplies, that no input tax credit on such supplies has been availed of by him. 

3. An undertaking by the recipient of deemed export supplies that he shall not claim the refund in respect of such supplies and the supplier may claim the refund.

Reporting in Annual Return Deemed export transactions is to be reported in Table-4E of GSTR-9.

Q1. Can an exporter get exemption from the payment of GST on the export product? 

An exporter could get exemption from the payment of GST on the final product and claim refund of GST paid on inputs. 

Q2. What are the GST refund options available to the exporters? 

An exporter would be eligible to claim refund under one of the following two options, namely – 

(a) He may export under bond, without payment of IGST and claim refund of unutilized input tax credit or 

(b) He may export on payment of IGST and claim refund of IGST paid on goods and services exported. The SEZ developer or SEZ unit receiving zero rated supply can also claim refund of IGST paid by the firm making supply to SEZ. 

Q3. How are exports treated under GST? 

All exports under GST law are deemed as inter-State supplies. Exports of goods and services are treated as zero rated supplies. The exporter has the option either to export under bond/Letter of Undertaking without payment of tax and claim refund of ITC or pay IGST by utilizing ITC or in cash at the time of export and claim refund of IGST paid.

E waybill - Beware

E waybill - Beware

Consequences of Incorrect E-Way Bill

While the paramount reason to generate e-way bills correctly for a business entity is to avoid paying e-way bill penalties, there are many other reasons why having a streamlined e-way bill system in place becomes essential. Here are the significant consequences of incorrect e-way bill generation:

1. Confiscation of Goods and Vehicle

An e-way bill is a mandatory document that a transporter must carry while the movement of goods happens across the country, whether interstate or intrastate. The enforcement authorised officers can stop any vehicle for e-way bill document verification at any check post. And, if they get any tax evasion information, they can even carry on the vehicle’s physical verification.

In case the transporter is found sans e-way bill during travel, the inspection officer has the right to confiscate or detain the goods along with the vehicle.

2. Unnecessary Delays

There is a legal validity period for an e-way bill after the vehicle starts the journey. If the journey incurs delays, one must pay a penalty for the wrong e-way bill due to the bill expiry.

A mistake in the e-way bill is bound to cause these delays and slow the process.

3. Loss of Input Tax Credit (ITC)

If e-way bill compliance is not managed correctly, there may be a risk of losing eligibility for claiming Input Tax Credit. This can lead to increased costs for the business, impacting profitability.

4. Penalties and Fines

One of the immediate consequences of e-way bill errors is the imposition of e-way bill penalties and fines by tax authorities. The amount of the GST e-way bill penalty can vary based on the nature and severity of the e-way bill non-compliance.

Year Percentage of Error Descriptions

2018 30% Errors in the initial period of e-way bill rollout

2019 25% Multiple reports stated 1 in 4 e-way bills had compliance issues

2020 20% Errors improve as the system stabilized

2021 18% 1 in 5 e-way bills still contain errors

2022 15% Gradual improvement with time

2023 12% Projected improvement with enhanced digitisation

Common Errors in E-Way Bill

Several common errors can occur during the generation and management of e-way bill. Businesses need to be aware of these errors to avoid potential consequences. So, the question is – how to avoid an e-way bill penalty? Here are some common e-way bill errors to avoid:

1. Incorrect Invoice Details

• A mismatch between the details on the e-way bill and the actual invoice.

• Incorrect invoice number, date, or value.

2. Mismatch in Goods Description

• There are discrepancies between the description of goods on the e-way bill and the actual goods being transported.

• Incomplete or inaccurate information about the goods.

3. Incorrect Vehicle Details

• Errors in providing the vehicle number, mode of transport, or transporter details.

• Failure to update vehicle details in case of a change.

4. Invalid GSTIN

Providing a correct Goods and Services Tax Identification Number (GSTIN) for the supplier, recipient, or transporter is essential information for e-way bill compliance.

5. Mismatch in the HSN Code

Incorrect Harmonized System of Nomenclature (HSN) code for goods transported causes e-way bill penalties.

6. Inconsistent Unit of Measurement

When there are inconsistencies in the unit of measurement used for quantity, weight, or volume on the e-way bill, causing penalties.

7. Late Generation of E-Way Bill

Failure to generate the e-way bill within the prescribed timeframe leads to delays and potential penalties.

8. Multiple E-Way Bills for the Same Shipment

If one generates multiple e-way bills for the same consignment, it causes confusion and potential legal issues.

9. Failure to Update E-Way Bill

Only update the e-way bill with relevant information if there are changes during transit, such as a change in the mode of transport or vehicle.

10. Non-Compliance with Distance Rules

Not adhering to the distance rules for e-way bill generation, especially for over-dimensional cargo. You hence need to calculate e-way bill validity period carefully.

How to Prevent Paying Penalty for E Waybill?

There is always a solution for any adverse situation, and an E-way bill is no exception. You need to adopt these precautions while filling Part B of the E-way Bill, which we have mentioned below, and you will be saved from the unnecessary burden of GST penalty for the e-way bill mistake.

5 Precautions that You Must Follow to Bar the Penalties

1. Never Skip Your E-Way Bill Generation

E-way bills are compulsory to be created by either the supplier or transporter of goods. They will face heavy penalties and fines for e-way bill errors if none of them generates it. Quickly generate e-way bills in compliance with regulations via various, e-way bill software that ensures seamless and penalty-free transactions.

2. Real-time Updates for Unforeseen Circumstances

If, within the valid time period mentioned in the Eway bill, the goods do not get transported because of unforeseen circumstances, then the concerned person can update the transportation details by generating a new Eway bill. Do real-time and hassle-free transportation updates of Part-B of e-way bill through e-way bill software, adapting to unforeseen circumstances and avoiding GST penalties for e-way bill mistakes.

3. Efficient Management of Multiple Vehicles Invoicing

If multiple vehicles are involved in goods transportation, then before the first consignment gets completed, the supplier must issue the invoice. Plus, there must be an invoice copy and delivery challans copies for further consignments. An original invoice will only be forwarded along with the last consignment.

Use software to streamline multi-vehicle invoicing and ensure each consignment meets e-way bill compliance.

Tip- If you change the mode of conveyance between transportation, you do not need to generate several e-way bills for each mode. Simply update the details on the existing e-way bill, and the process is complete. You can easily do it on E-Way Bill Software. No need for multiple e-way bills; simply update the information on a single e-way bill online and stay penalty-free. 

4. Consolidation of Multiple E-Way Bills

You must generate separate e-way bills for multiple consignments. Each invoice requires its own individual e-way bill for compliance. However, if all consignments are going in one vehicle, then after generating multiple e-way bills, you can consolidate those into one final e-way bill.  

Effortlessly consolidate multiple e-way bills into one final bill using our e-way bill software, simplifying the process for consignments in a single vehicle.

5. Document Verification and Validity Check

Verify that all required e-way bill documents are accurate and valid before transportation. Any errors can void the transaction and make you liable to pay a GST e-way bill penalty.

Mitigate risks of void transactions by utilising e-way bill software’s document management and validation tools, ensuring all necessary documents are accurate and valid.

Inclusions of Transaction Value

Inclusions of Transaction Value

The following items will be included in transaction value for finding out taxable value, if the items are not included in transaction value or invoice price separately charged.

(1) Packing charges

The expenses associated with standard packing will be borne, as it is typically linked to or pertains to the supply. Packing provided by the recipient must be accounted for, similar to the costs of any other materials supplied. 

Occasionally, items are packaged in robust and returnable containers, such as cooking gas in cylinders, cold beverages in bottles, etc. It is understood that the gas cylinder or bottle of cold drink is sent back to the manufacturer for refilling. 'Returnable' signifies that it should generally be returnable according to the agreement or understanding established between the buyer and seller. 

The mere physical ability to return is insufficient. Manufacturers frequently require a security deposit from the buyer to guarantee the return of the container. However, these containers are not sold to the buyer. The deposit is forfeited if the container is not returned. 

The cost associated with such durable and returnable packing will not be included. The supply of such containers may be in 'relation' to the supply. Nevertheless, this relationship is only remote and indirect. There is no actual supply of the container. 

It constitutes a transaction of bailment. There is no direct 'connection' between the supply of durable and returnable containers and the sale. Therefore, in certain instances, goods are packaged in returnable packing, such as gas cylinders, drums, etc. In these cases, tax is only applicable on the consideration received for the supply. Consequently, it is unnecessary to include the amortized cost of durable and returnable packing.

(2) Taxes Other than GST

Any taxes, duties, fees, and charges imposed under any legislation other than the GST Act are to be included in the value if they are billed separately. However, CGST, SGST, IGST, and UTGST are excluded. 

Therefore, SCST and CGST will only be applicable on the net value. The term 'Value' for GST purposes will not encompass ISGT, CGST, SGST, and GST Compensation Cess. Nevertheless, other taxes (such as entertainment tax or any other cess) will be included if they are separately charged in the invoice.

(3) Amount paid by recipient on behalf of supplier

Any sum that the supplier is obligated to pay concerning such supply, which has been incurred by the recipient of the supply and is not included in the price actually paid or payable for the goods or services, or both, is included in the value.

(4) Incidental expenses

Incidental costs, including commissions and packing fees, imposed by the supplier on the recipient of a supply, encompass any charges related to actions taken by the supplier concerning the provision of goods and/or services prior to or at the time of delivery. Expenses such as weighment, factory loading, inspection, and testing conducted before the supply will be included in the 'value'. Additionally, design charges incurred prior to the supply will also be considered.

(5) Interest, late fee or penalty for delayed payment.

The interest, late fee, or penalty associated with the delayed payment of any consideration for any supply is included in the value.

(6) Outward freight, packing and other charges in tax invoice

For contracts based on the FOR basis, the supplier is responsible for arranging transportation. In this scenario, he is liable to pay GST under the reverse charge mechanism on the outward freight. Subsequently, he includes the outward freight in the tax invoice. In this instance, the outward freight charged is considered part of the total value of the goods, and GST is applicable on the value that encompasses the outward freight. Likewise, packing charges, weighment fees, and other associated charges are also included in the value for the purpose of GST levy. The GST rate is the same as that applicable to the goods, as this constitutes a composite supply.

(7) Subsidies directly linked in supply

Subsidies that are directly associated with the price, excluding those provided by the Central and State Governments, are to be included in the 'Value' for the purpose of GST charges. Explanation: The total amount of subsidy must be incorporated into the value of the supply made by the supplier who receives the subsidy.

(8) Installation charges

If the supplier assumes responsibility for the installation and erection of machinery or a plant at the recipient's site and charges for this service, the amount will be included in the overall value. If the installation fees are billed separately, they will be added to the transaction value.

(9) Design and Engineering charges

Design and Engineering Charges are crucial for the manufacturing process and therefore must be incorporated into the overall value.

(10) Compulsory after Sales Service/service in warranty period is included

The terms 'servicing' and 'warranty' have been explicitly incorporated into the definition of payments that are part of the 'transaction value'. Manufacturers frequently offer complimentary after-sale services throughout the warranty period. Although these are referred to as 'free services', the expenses associated with such services are already factored into the product's price. The assurance of after-sale service provision undoubtedly enhances the product's marketability, as it is related to the sale, and its cost is included.

Exclusion from Transaction Value

The subsequent items will be omitted from the transaction value when determining the taxable value of the supply. –

(1) Discount or incentive given after supply

The value of the supply shall not encompass any discount that is provided: 

(a) Prior to or at the moment of the supply, provided that such discount has been properly documented in the invoice issued concerning that supply; and 

(b) Following the completion of the supply, on the condition that 

(i) such discount is confirmed in accordance with an agreement made at or before the time of the supply and is specifically associated with the relevant invoices; and 

(ii) the input tax credit attributable to the discount has been reversed by the recipient of the supply. 

Therefore, a discount after the supply is allowable as a deduction only if it was known prior to or at the time of the supply. 

(2) When value is inclusive of GST

Legally, GST must be displayed separately on the tax invoice. 

However, there are provisions for cases where GST is not separately indicated on the tax invoice. If the value of supply includes IGST, CGST, SGST, or UTGST, the tax payable will be determined through back calculations as follows — 

Tax amount = [Value inclusive of tax + Tax rate in %] / 100 + sum of applicable tax rates in % It is important to note that this provision only applies to the value of supply that includes GST. 

The regulation does not state that the value is considered to be inclusive of GST.

GST Valuation Rules

GST Valuation Rules

Rule 27

Value of supply of goods or services where the consideration is not wholly in money

Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall, -

(a) be the open market value of such supply.

(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply.

(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality.

(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.

Rule 28

Value of supply of goods or services or both between distinct and related persons, other than through an agent

28(1)

[The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-

(a) be the open market value of such supply.

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality.

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.] 1

1 Renumbered as sub-rule (1) vide Notification 52/2023-CT dt 26.10.2023.

28(2)

[Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person [located in India] 2, by way of providing corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered [per annum] 3, or the actual consideration, whichever is higher.] 1

[Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the value of said supply of services.] 4

1 Inserted vide vide Notification 52/2023-CT dt 26.10.2023.

2,3,4 Inserted vide Notification 12/2024-CT dt 10.7.2024. Effective from 26.10.2023

Rule 29

Value of supply of goods made or received through an agent

The value of supply of goods between the principal and his agent shall-

(a) be the open market value of the goods being supplied, or at the option of the supplier, be ninety percent. of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person, where the goods are intended for further supply by the said recipient.

Illustration: A principal supplies groundnut to his agent and the agent is supplying groundnuts of like kind and quality in subsequent supplies at a price of five thousand rupees per quintal on the day of the supply. Another independent supplier is supplying groundnuts of like kind and quality to the said agent at the price of four thousand five hundred and fifty rupees per quintal. The value of the supply made by the principal shall be four thousand five hundred and fifty rupees per quintal or where he exercises the option, the value shall be 90 per cent. of five thousand rupees i.e., four thousand five hundred rupees per quintal.

(b) where the value of a supply is not determinable under clause (a), the same shall be determined by the application of rule 30 or rule 31 in that order.

Rule 30

Value of supply of goods or services or both based on cost

Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

Rule 31

Residual method for determination of value of supply of goods or services or both

Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter:

Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30.

Rule 31A

Value of supply in case of lottery, betting, gambling and horse racing

Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall be determined in the manner provided hereinafter.

Rule 31B

Value of supply in case of online gaming including online money gaming

[Notwithstanding anything contained in this chapter, the value of supply of online gaming, including supply of actionable claims involved in online money gaming, shall be the total amount paid or payable to or deposited with the supplier by way of money or money’s worth, including virtual digital assets, by or on behalf of the player:

Provided that any amount returned or refunded by the supplier to the player for any reasons whatsoever, including player not using the amount paid or deposited with the supplier for participating in any event, shall not be deductible from the value of supply of online money gaming.

Explanation.- For the purpose of rule 31B and rule 31C, any amount received by the player by winning any event, including game, scheme, competition or any other activity or process, which is used for playing by the said player in a further event without withdrawing, shall not be considered as the amount paid to or deposited with the supplier by or on behalf of the said player.] 1

1 Inserted vide notification 51/2023-CT dt 29.9.2023. Effective from 1.10.2023.

Rule 31C

Value of supply of actionable claims in case of casino

[Notwithstanding anything contained in this chapter, the value of supply of actionable claims in casino shall be the total amount paid or payable by or on behalf of the player for –

(i) purchase of the tokens, chips, coins or tickets, by whatever name called, for use in casino; or

(ii) participating in any event, including game, scheme, competition or any other activity or process, in the casino, in cases where the token, chips, coins or tickets, by whatever name called, are not required:

Provided that any amount returned or refunded by the casino to the player on return of token, coins, chips, or tickets, as the case may be, or otherwise, shall not be deductible from the value of the supply of actionable claims in casino.

Explanation.- For the purpose of rule 31B and rule 31C, any amount received by the player by winning any event, including game, scheme, competition or any other activity or process, which is used for playing by the said player in a further event without withdrawing, shall not be considered as the amount paid to or deposited with the supplier by or on behalf of the said player.] 1

1 Inserted vide notification 51/2023-CT dt 29.9.2023. Effective from 1.10.2023.

Rule 32

Determination of value in respect of certain supplies

Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall, at the option of the supplier, be determined in the manner provided hereinafter.

Rule 32A

Value of supply in cases where Kerala Flood Cess is applicable

[The value of supply of goods or services or both on which Kerala Flood Cess is levied under clause 14 of the Kerala Finance Bill, 2019 shall be deemed to be the value determined in terms of section 15 of the Act, but shall not include the said cess] 1

1 Inserted vide Notification no. 31/2019 - CT dt 28.6.2019

Rule 33

Value of supply of services in case of pure agent

Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely, -

(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient.

(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and

(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

Explanation. - For the purposes of this rule, the expression “pure agent” means a person who-

(a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;

(b) neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply.

(c) does not use for his own interest such goods or services so procured; and 

(d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

Illustration. - Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B. Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to the Registrar of Companies. The fees charged by the Registrar of Companies for the registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, A’s recovery of such expenses is a disbursement and not part of the value of supply made by A to B. 

Rule 34

Rate of exchange of currency, other than Indian rupees, for determination of value

[The rate of exchange for determination of value of taxable goods shall be the applicable rate of exchange as notified by the Board under section 14 of the Customs Act, 1962 for the date of time of supply of such goods in terms of section 12 of the Act.] 1

1 Amended vide Notification no. 17/2017-CT dt 27.07.2017. Till then, the rule read as follows– “34. Rate of exchange of currency, other than Indian rupees, for determination of value.-The rate of exchange for the determination of the value of taxable goods or services or both shall be the applicable reference rate for that currency as determined by the Reserve Bank of India on the date of time of supply in respect of such supply in terms of section 12 or, as the case may be, section 13 of the Act.”

Rule 35

Value of supply inclusive of integrated tax, central tax, State tax, Union territory tax

Where the value of supply is inclusive of integrated tax or, as the case may be, central tax, State tax, Union territory tax, the tax amount shall be determined in the following manner, 

Tax amount = (Value inclusive of taxes X tax rate in % of IGST or as the case may be CGST, SGST or UTGST) / (100+ sum of tax rates, as applicable, in %)

Explanation. - For the purposes of this Chapter, -

(a) “open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

(b) “supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.

GST compliance in related party transactions

GST compliance in related party transactions

Dealing with GST in business is like navigating a roadmap with lots of signs and signals. When it comes to related party transactions – basically, business deals with family members, friends, or companies you have a close connection with – it gets even more complicated. It’s imperative to get this right because non-compliance with GST compliance in related party transactions can lead to tax troubles and strained business relationships.

Imagine you run a business and often deal with companies owned by your relatives or close friends. In these cases, you’re not just thinking about profit and loss, but also about balancing personal relationships with professional responsibilities. This is where understanding the regulations of GST on related party transactions becomes essential. GST regulations are applied uniformly, irrespective of whether business transactions are conducted with unrelated entities or with familial connections. They mandate adherence to the same set of rules for all transactions, emphasizing compliance without distinction.

In this blog, we’re going to break down what the GST regime holds for these kinds of transactions. Whether you’ve been in business for years or are just getting started, it’s important to know how to handle these situations. We will discover how GST applies to related party transactions in a way that’s easy to understand and practical. We’ll look at some common scenarios, point out potential pitfalls, and offer tips on how to stay on top of your GST obligations.

Understanding GST and Its Application

The Goods and Services Tax (GST) represents a significant shift in how taxes are levied and collected. Introduced to create a unified tax structure, GST has streamlined various indirect taxes under one umbrella. Understanding its application, especially in the context of Related Party Transactions, is quintessential for businesses aiming for compliance and financial prudence.

GST, implemented in India in July 2017, subsumed multiple taxes like VAT, Service Tax, and Excise Duty into a single tax system. This move aimed to eliminate the cascading effect of taxes and create a more seamless national market. For businesses, this meant a complete overhaul of their tax reporting and compliance mechanisms.

GST and Its Application to Related Party Transactions

When it comes to Related Party Transactions and GST, the rules are quite specific. As per GST laws, a related party transaction is any transfer of goods or services between related entities, which could be companies under common control or where family members are involved in management or ownership. GST on Related Party Transactions is determined based on the nature of the transaction and the relationship between the entities involved.

GST implications for Related Party Transactions often revolve around how these transactions are valued and recorded. The transactions must be valued at an ‘Arm’s Length Price’ – the price that would be charged to an unrelated party under similar circumstances. This ensures that transactions are fair and market-based, preventing tax evasion through transfer pricing.

Examples of Related Party Transactions

Example 1: Consulting Services Between Parent and Subsidiary Companies

Imagine a parent company offering consulting services to its subsidiary. Even if these services are provided free of charge, for GST purposes, they need to be valued as if they were sold to an outsider. GST then applies to this ‘market value’.

Example 2: Property Leasing Between a Firm and Its Director

If a business is renting property from one of its directors, the rent charged must be in line with what would be charged to an unrelated tenant. This ensures that the transaction is fair, and GST is properly applied.

Ensuring Compliance and Transparency

It’s important for businesses to record these transactions accurately, reflecting the true market value. This is a prerequisite for adhering to GST compliances in Related Party Transactions. Given the complexities involved in any business scenario involving RPT, it’s often wise for businesses to consult with tax professionals to ensure they are fully compliant with GST laws regarding these transactions.

Identifying Related Party Transactions Under GST

Related parties, as defined in section 2(84) of the CGST Act, are identified in the following scenarios:

• When an individual serves as an officer or director in one business and also holds a similar position in another business.

• When businesses are officially recognized as partners.

• In cases where an employer-employee relationship exists.

• If a person owns, directly or indirectly, at least 25% of the shares in another company.

• When one party has direct or indirect control over the other.

• If both parties are governed by the same controlling authority or management.

• When together, the entities exert control over another entity.

• If the business’s promoters or managerial personnel are part of the same family.

Understanding and identifying Related Party Transactions under GST is imperative for ensuring GST compliance in business operations. These transactions, often complex, can have significant GST implications for Related Party Transactions. Let’s understand the criteria, types, and challenges associated with these transactions.

Criteria for Related Party Transactions Under GST

• Definition Under GST: A related party transaction typically involves businesses that are connected through family, management, or capital. Under GST, these are broadly defined to include transactions between holding companies and subsidiaries, associates, and key management personnel and their relatives.

• GST on Related Party Transactions: These transactions are carefully scrutinized under GST laws. The focus is on ensuring that the transactions are conducted at arm’s length, meaning the value of the transaction should reflect a fair market price, as if the parties were unrelated.

Breakdown of Different Types of Related Party Transactions

• Sales and Purchases of Goods and Services: This includes any sale or purchase of goods or services between related entities. For instance, a company selling products to its subsidiary would fall under this category.

• Loans and Financial Transactions: Financial transactions like loans or advances between related parties also come under the purview of GST. The interest rates and terms of these transactions need to mirror what would be expected in transactions with unrelated parties.

• Property Leases and Rentals: Leasing or renting of property between related entities is another common type of related party transaction. The rent or lease amount should align with the going market rates to adhere to GST norms.

Challenges in Identifying and Categorizing These Transactions

• Complex Ownership Structures: One of the biggest challenges is resolving complex ownership structures to determine if entities are related. This can be particularly challenging in large conglomerates with multiple layers of subsidiaries and associate companies.

• Valuation of Transactions: Assigning a fair market value to transactions between related parties can be subjective and challenging. Ensuring that these valuations meet the arm’s length standard and are compliant with GST laws is important.

• Maintaining Documentation: Adequate and accurate documentation is essential for GST compliance in Related Party Transactions. This includes contracts, agreements, and correspondence that justify the transaction values and terms.

Impact of Related Party Transactions on GST

Effect on GST Calculations

Related Party Transactions under GST often involve complex calculations. The GST levied depends on the transaction value, which must reflect an arm’s length price. If a business undervalues a service or product provided to a related entity, it can lead to underpayment of GST, skewing the entire tax calculation process.

Legal and Financial Implications

Mismanagement of these transactions can lead to legal consequences, including penalties and audits by tax authorities. GST compliance in Related Party Transactions is critical to avoid these risks. If transactions are not recorded at arm’s length prices or if GST is inaccurately calculated, it can result in significant financial liabilities.

Exemptions and Special Considerations

Understanding Exemptions in GST for RPTs

There are certain exemptions and special considerations within the GST framework for Related Party Transactions. These can include transactions that are non-commercial in nature or those that fall under specific thresholds defined by GST laws.

Impact on Business Strategies

Knowing these exemptions allows businesses to strategize effectively. For instance, structuring transactions to legally leverage these exemptions can result in tax savings and more efficient financial planning.

Managing Exemptions Effectively

To utilize these exemptions without breaching compliance, businesses should maintain thorough documentation, seek expert advice, and stay updated on GST regulations. Understanding the exemptions in GST on Related Party Transactions is key to effective management.

Challenges and Risks Associated

1. Identifying Risks: One of the primary challenges in GST compliance in Related Party Transactions is accurately identifying whether a transaction falls under the related party criteria. This often involves complex legal and financial assessments, especially in large or multinational corporations.

2. Valuation Challenges: Valuing goods and services in a manner compliant with GST regulations can be challenging. The risk lies in the subjective nature of valuation, which can lead to discrepancies and potential disputes with tax authorities.

3. Effective Risk Management Strategies: Regular audits, clear internal guidelines, and training for staff involved in these transactions are essential. Additionally, consulting with GST experts and leveraging technology for accurate record-keeping can mitigate risks associated with Related Party Transactions and GST.

4. Maintaining Transparency and Documentation: Accurate documentation is critical in GST compliance for Related Party Transactions. The challenge lies in maintaining transparent records that clearly demonstrate the arm’s length nature of transactions. Failure to do so can raise red flags during audits, leading to legal complications.

5. Understanding and Adapting to Regulatory Changes: The GST framework is subject to periodic updates and changes. Staying abreast of these changes and understanding how they impact Related Party Transactions is a challenge for businesses. Adapting to these regulatory shifts promptly is crucial to avoid non-compliance.

6. Dealing with Cross-Border Transactions: For multinational corporations, cross-border related party transactions add another layer of complexity. These transactions must comply not only with Indian GST laws but also with international tax regulations. Understanding and reconciling these different requirements pose a significant challenge.

7. Technology Integration and Data Management: Leveraging technology for managing and analyzing transaction data is essential. However, integrating the right technology that can handle the complexities of GST on Related Party Transactions is a challenge. Ensuring that the chosen technology aligns with the compliance requirements and effectively manages data is vital.

8. Managing Stakeholder Expectations: Balancing the expectations of various stakeholders, including shareholders, tax authorities, and related entities, while ensuring GST compliance in Related Party Transactions is a delicate task. It requires a strategic approach to ensure all parties are informed and satisfied.

ITC Under GST

ITC Under GST

Not eligible

S. No. Items Exceptions

1 Motor Vehicles Except in cases:

“Extended supply of such vehicles or conveyances;”

“Transportation of passengers”

2 Other Conveyances “Providing training on driving, navigating such vehicles”

“Conveyances for transportation of goods”

“Motor vehicles for transportation of persons having an approved capacity of more than thirteen persons including driver when they are used for business purposes”

“Buses for pick and drop of employees (if approved capacity is more than 13 persons including driver) – part of above.”

3 Insurance, repairs and maintenance for motor vehicles and conveyance are not allowed “Except where an inward supply of goods or services or both of a particular category is consumed by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply”

“ITC is available in respect of food and beverages or health services where the provision of such goods or services is obligatory for an employer to provide to employees under any law for time being in force.”

4 Membership in a Health Centre “Only allowed under this head if ITC on vehicles are allowed;”

“If the ITC on any type of vehicle is not allowed, then the cost of insurance, repairs and maintenance for such vehicles is also not allowed.”

5 Membership of a Club, –

6 Membership in a Fitness Centre; –

7 Works contract services when supplied for the construction of an immovable property –

7 Rent-a-cab, Life Insurance, Health Insurance “Gifts to employees are exempted from GST up to a value of Rs 50,000 per employee – Schedule I of CGST Act, 2017 (Refer Sec 7)”

8 Travel benefits extended to employees on vacation such as leave –

9 Travel benefits on home travel concession (LTA) –

11 “Except where it is an input service for the extended supply of works contract service and plant and machinery” Goods or services or both received by a taxable person for the construction of an immovable property

12 “Gifts to employees is exempted from GST up to a value of Rs 50,000 per employee – Schedule I of CGST Act, 2017 (Refer Sec 7)” “Except goods or services received on his own account including when such goods or services or both are used in the course or furtherance of business and plant and machinery”

13 Goods or services or both on which tax has been paid under section 10; ie. Under section 10 composition scheme

14 Goods or services or both received by a non-resident taxable person “Except on goods imported by him”

15 Goods or services or both used for personal consumption –

16 Goods lost –

17 Goods written off –

18 Goods destroyed –

19 Goods stolen –

20 Goods disposed of by way of gift or free

samples “Gifts to employees are exempted from GST up to a value of Rs 50,000 per employee – Schedule I of CGST Act, 2017 (Refer Sec 7)”

21 Any tax paid in accordance with the provisions of sections 74, 129 and 130. I.e. In Fraud, Misstatement, etc.

ITC Eligible

Companies claim ITC solely for commercial endeavours. This rule excludes expenses for personal use, exempt goods, or goods not eligible for ITC claims. Companies can use ITC to purchase raw materials, packing materials, spare parts, consumables, printing, and stationery items.

Claim ITC on capital goods such as:

• Plant and machinery

• Support structures used for plant and machinery

• Motor vehicles used for transportation of goods

• Repairs required for such transporting trucks

• Electronics, furniture, appliances, etc.

Taxpayers can get tax credits for various expenses. It includes cleaning, rent, internet, cell phones, bank fees, repairs, advertising, legal fees, and conferences.

Common Credit in ITC

A company may acquire capital goods, input commodities, and services from outside sources. Additionally, it may use the items and services acquired for private or commercial purposes. Under GST, businesses know the aggregate input tax credit on all such purchases as Proportionate Credit or Common Credit. The taxpayer cannot claim credit for inputs utilised for private purposes. Therefore, you should apply the standard credit when paying the production tax liability.

Utilise the standard credit under two fundamental criteria:

1. You can use ITC only for commercial purposes, not for personal use of goods and services.

2. ITC is eligible only for selling taxable goods and services.

3. ITC does not apply to exempted supplies.